DR. P. D. SHENOY,  MEMBER

 

 

            The main issue to be decided in this case relates to the calculation of depreciation in the absence of any statutory norms laid down under the Insurance Act or by the Insurance Regulatory and Development Authority or standard guidelines laid down by Tariff Advisory  Committee or by the New India Assurance Company itself through an omnibus circular.  Whether the stand of the Insurance Company in deducting 60% towards depreciation while indemnifying the loss is valid?  We have made concerted efforts to find an answer to this question.

 

Case of the complainant  :-

 

          The complainant is carrying on business of manufacture of cold roll steel strips and galvanized plain and corrugated sheets for the last several years and had set up a plant for this purpose at Sahibabad, U.P. spending approximately Rs. 650 crores.  The complainant had taken an insurance policy from New India Assurance Company (hereinafter referred to as Insurance Company) for the entire machinery and equipment for the said mill for a sum of Rs.62,09,655/-.  The policy was further renewed for the period from 29.9.1999 to 29.9.2000.

          It is the say of the complainant that due to a fire accident on 12.12.1998 20 Hi cold rolling mill fitted with imported equipment was fully destroyed resulting a loss of Rs. 35.08 crores.  Though steps were taken to control and put off the fire, the machinery was totally destroyed.  However, loss to other cold rolling mill and galvanized plants in the same block could be prevented. 

          The Insurance Company was intimated on 12.12.1998 itself.  Thereafter, the Insurance Company appointed M/s R.K. Singhal & Co. Pvt. Ltd. as surveyor and  complainant submitted various details to them.  Subsequently, the Insurance Company appointed two more surveyors along with M/s R.K. Singhal Pvt. Ltd.  namely M/s A.K. Govil & Associates and M/s P.C. Gandhi.  A fire claim for Rs. 35.08 crores was formally filed with the Insurance Company on 29.1.1999 which was based upon the quotations received from various manufacturers of the said machinery and the complete details of cost for replacing and/or repairing the machines.

          As the destroyed machine was very important to the running of the company, the complainant could not wait for the procedural delays in getting relief from the Insurance Company. The Company got a 6 Hi rolling mill installed in its unit and commenced the production for which the complainant spent Rs.29.60 crores plus excise duties etc.   Based on the interim report of the surveyors after deduction of Rs.7,19,095/- on account of FEA discount, a sum of Rs.4,92,80,905/-was released to the complainant on 24.3.1999.  Immediately after release of Rs. 4,92,80,905/-, complainant placed an order for repair of 20 Hi cold rolling machine with M/s Flat Products Equipments (India) Ltd. (hereinafter referred to as M/s Flat Products) for reinstating the same by replacing the totally damaged and partially damaged parts for Rs. 25 crores plus tax and paid a sum of Rs.3,75,00,000/- to M/s Flat Products.  Further, a sum of Rs. 47.50 lakhs on account of inspection charges of mill housing and Rs. 25 lakhs for transportation of mill housing to Bombay were also paid. Though the complainant lost more than Rs. 25 crores, in view of the persistence from the insurance company, the complainant gave consent for receiving Rs.20.95 crores as net adjusted loss after taking into account the salvage and excess as applicable on 16.6.99  in order to avoid any further loss of time.  Thereafter, despite the facts that various requests were made to release the balance amount the Insurance Company did not consider the same.  Therefore, the complainant filed the complaint on 30.5.2000, claiming the following amount :

a)    Rs.15.95 crores on account of balance claim for fire loss.

b)    Interest @ 18% from 16.6.1999 till its actual payment.

c)    Rs. 73 lacs on account of inspection and transportation charges.

d)    Damages @ Rs. 3 crores per month which the plaintiff is suffering from August 1999 till the release of payment as prayed for under claim (a).

 

Case of the Opposite Party

 

          As soon as the information was received about the fire accident dt. 12.12.1998 in the complainant’s 20 Hi Cold Rolling Mill and upon receipt of intimation of the said loss, the Insurance Company appointed the surveyors immediately. On the basis of the interim survey report of the Joint Surveyors dt. 4.2.1999, the Insurance Company made an on-account payment of Rs. 5 crore after deducting Rs.7,19,095/- towards  Extinguishing Appliances discount recovery to the complainant on 24.3.1999. 

 

After the release of the on-account payment, the Insurance Company received complaints stating that the claim of the complainants was not bonafide and it was referred to the vigilance department of the respondent.  On 26.7.2000 CBI approached the Insurance Company in respect of the vigilance complaint.  The Insurance Company in the meantime appointed M/s Allianz Zentrum Fur Technik Gm BH, Germany for technical opinion which was submitted on 26.11.2000.  Joint Surveyors submitted their final report on 11.12.2001 and on 18.1.2002 Chief Vigilance Officer closed the complaints.

On 27.3.2002 the complainant for the first time, informed the Insurance Company the fact of having already installed a new Cold Rolling Mill and requested them for joint inspection with the surveyor.  Late in July 2002, complainant for the first time stated that damaged mill cannot be reinstated as the manufacturers, M/s Flat Products have informed the complainant that they have lost their experts.  On 11.12.2001, the joint surveyors submitted their final survey report  to the respondent in which they assessed the loss of the damaged mill at Rs. 1955.51 lakhs on replacement basis and at Rs. 1351.27 lakhs on depreciation basis.  The complainant for the first time, informed the Insurance Company that they have installed new cold rolling mill and fresh visit by the surveyors be arranged to verify the reinstatement and the claim may be settled on reinstatement basis.  Along with the said letter, the complainant enclosed an un-dated letter addressed to the Chairman of the Insurance Company, in which it was mentioned that the mill installed in Sept/Oct 1999 be treated as reinstatement of the damaged mill.  The surveyors on 3.5.2002 requested the complainant to furnish several information for which, there was no response for quite sometime.  The complainant’s plea in their letter dated 27.3.2002 that it had placed an order for cold rolling mill on 11.1.99  which was installed in Sept/Oct 1999 at the cost of Rs. 31.37 crores which may be treated as reinstatement and the claim may be settled on its basis, is frivolous and cannot be honoured.  The machine which has been installed is 6 Hi Cold Rolling Mill as against the damaged mill which was 20 Hi Cold Rolling Mill.

Submissions of the Learned Sr. Counsel for the complainant :

 

          Learned Senior Counsel Mr. Harish Malhotra submitted that the complainant had installed cold rolling mill and galvanized complex, ancillary and auxiliary plant including the power plant by spending Rs.650 crores for setting up the said unit at Sahibabad, U.P. and also had taken an insurance policy from New India Assurance Company for a sum of Rs.551.84 crores.  The Insurance Company had accepted value of 20 Hi cold rolling mill at Rs. 80 crores.  The policy was renewed year after year and the premium of Rs. 62,09,655/- was paid in the year in which the fire accident took place and the cold rolling mill and imported equipments were fully destroyed and the complainant suffered a loss of Rs.35.08 crores. 

 

          The Insurance Company appointed M/s R.K. Singhal & Co Pvt. Ltd. initially, thereafter appointed two more surveyors M/s A.K. Govil & Associates  and M/s P.C. Gandhi & Associates on 29.1.1999.  A fire claim of Rs. 35.08 crores was formally filed on 29.1.1999. 

 

 

 

 

         Based on all above Insured’s loss was assessed as per details worked out and adjusted as under :

SUMMARY OF ASSESSED LOSS

	Replacement Rs. In lacs.	Repair         Rs. In lacs	Loss on depreciation Basis (Rs. In lacs)
Section A Section B Section C Section D Basic cost (Total Section A to D) Packing/Freight etc. @ 20% Excise  Duty @ 15%   CST @ 4%   Less : Excise Duty   Replacement Cost   Add : Supervision/ Calibration of repaired items/ erection etc. @ 10%   Replacement  Cost Repair Cost   Add : Integration cost @ 7.5%   Less : Depreciation 32%   Less : Salvage Net Assessed Loss Less : Under Insurance @ 1.95%] Less : Policy Excess Net Adjusted Loss	1558.00 50.00     _________ 1608.00   32.16              246.02 1886.18              75.45 1961.63            246.02 1715.61                        154.11 1869.72              140.23 2009.95                    13.00 1996.95              38.94 1958.01                      2.50 1955.51	99.00 9.20 21.30 10.60 140.10                          14.01 154.11	2009.95            643.18 1366.77              13.00 1353.77                   0.00 1353.77                    2.50 1351.27

 

          The learned senior counsel submitted that as per interim report  for eight years depreciation of 32%  @ 4% p.a. was taken.

          P.C. Gandhi and Associates have written to New India Assurance Co. Ltd. on December 7, 2002, an extract of which is given below :

 

“We refer to your letter No. FTD/SN/2002 dated 12.11.2002 and as requested by you, we wish to clarify as under :-

We have submitted to you our Final Survey Report dated 11^th December 2001 giving complete assessment on Reinstatement basis as well as on depreciation basis.  Complete details of basis of assessment is also given in the report.”

 

“In view of receipt of your above letter requesting us to give an alternate assessment  considering maximum depreciation since insured is not in a position to submit original invoices, we are closing the matter of verification of Reinstatement from our end and we trust you will find the same in order.

It may be noted that the alternate assessment submitted herewith under Annexure-1 is at your request as per your above referred letter.” (Emphasis supplied).

 

          Taking the value of machine at Rs. 28 crore and depreciation calculated at 32% the value comes to Rs.18.91 crores.  As against which Insurance Company has made on account payments to the tune of Rs.7.88 crores leaving a balance of Rs. 11 crores 3 lakhs payable by the Insurance Company. 

Submissions for the Senior Learned Counsel for the Opposite Parties:

 

          Learned Senior Counsel Mr. Abhishek Singhvi submitted that the complainant went on changing his stand from time to time.  The first stand taken by the complainant was on 29.1.1999 on which date the complainant submitted the claim for replacement of cold rolling mill, to the respondent and on 14.2.1999 the complainant gave an undertaking to the respondent that reinstatement of the damaged mill shall be carried out within the stipulated time as per the fire policy.

          Within a few months the complainants changed their stand and the second stand taken by the complainants was on 10.6.1999 on which date the complainant informed the respondent that it had placed an order for repair of the damaged cold rolling mill on M/s Flat Products and had made advance payment of Rs. 375 lakhs to M/s Flat Products.  The third stand taken by the complainant was on 26.11.99 on which date the complainant sought an extension of 24 months for reinstatement of the mill.  Finally the complainants changed their stand stating that M/s Flat Products have informed the complainant on 28.6.2001 that they have lost their experts who were involved in the design and manufacture of 20 Hi cold rolling mill therefore, damaged mill cannot be reinstated.  Accordingly, the complainant took a stand that as the damaged mill cannot be reinstated he seeks 6 Hi cold rolling mill be treated as reinstatement for 20 Hi cold rolling mill.  This shows that the complainants have been changing their stands frequently and, therefore, on this count  alone the complaint is liable to be rejected. 

 

As the complainants did not produce relevant records sought by the surveyors to assess the value of damaged machinery of cold rolling mill and also to arrive at a reasonable compensation, the Insurance Company had no other option but to settle the claim on maximum depreciation basis at Rs. 788.43 lakhs out of which ‘on account’ payment of Rs. 5 crores has already been paid to the complainant the balance comes to Rs.288.43 lakhs.  On 7.3.2003 the respondent paid the aforesaid sum after recovery of the premium of reinstatement statement of the sum insured/recovery of audit i.e. Rs.70,737/- and Rs. 5,94,920/- a net amount of Rs. 2,81,82,343/- was paid on 7.3.2003 by the Insurance Company to the complainant during the hearing before this Commission.  Hence, no further amount whatsoever, is payable to the complainant Company. 

FINDINGS :

          In this case the factum of insurance of cold rolling mill and other ancillary and auxiliary plants for a sum of Rs. 551.84 crores by making a payment of premium of Rs. 62,09,655/- for a period from 29.9.98 to 28.9.99 is not in dispute.  It is also not in dispute that this policy was renewed for a further period of one year by paying the premium amount.  The factum of fire in the said unit of the complainant on 12.12.1998 as a result of which 20 hi cold rolling mill fitted with imported equipment was destroyed is also not in dispute.  The fact that the Insurance Company had also appointed surveyors to assess the loss and made on account payment of Rs. 5 crore (approx) based on the interim survey report on 24.3.99 is also not in dispute.  The fact that on 26.7.2000 the CBI approached the respondent with respect to some complaints received by them against the insurance company which after investigation submitted a report to Chief Vigilance Commission which closed the case on 18.1.2002 is also not in dispute.  Accordingly, the Insurance Company was liable to compensate the loss incurred by the insured adequately. 

          Whenever such a massive cold rolling mill is damaged a prudent manufacturer would like to replace this cold rolling mill at the earliest and restart the production activities.  Accordingly, they submitted a claim for replacement to the Insurance  Company.  When they did not get any positive reaction from the Insurance Company for indemnifying loss to the 20 Hi cold rolling mill and paying compensation for replacing the same they had to think of an alternative, as they had received only Rs. 5 crore as on account payment on 30.3.1999.  They placed an order to M/s Flat Products on 10.6.99 for repair of the damaged cold rolling mill by making an advance payment of Rs. 375/- lakhs.   Replacement of this mill would have cost nearly Rs. 100 crores.  But according to M/s Flat Products replacement was not possible as original manufacturers lost their expertise in designing and manufacturing of the same.  Therefore, the idea of replacement was dropped as the damaged mill could not be repaired by the only company competent to do the same i.e. M/s Flat Products.  The company in sheer desperation had to seek compensation from the Insurance Company by requesting payment towards the smaller and less capacity machine i.e. 6 Hi cold rolling mill which has been installed by them.  Accordingly, we find that change of the stand taken by the complainant is a desperate act to save the company from ruins and run the same and it is not a deliberate act to enrich itself.  Therefore, we hold that the claim is a genuine claim.

          The issue now to be decided is what is the compensation payable and what should be the rate of depreciation.  The complainants have made a plea that they had installed cold rolling mill at a cost of Rs. 37.37 crores.  The surveyors have assessed the loss at Rs. 1955.51 lakhs on replacement basis and Rs. 1351.29 lakhs on depreciation basis.  This report says about warranties as follows :

“Specific warranties, if any, were found not attached with the policy.  However, general warranties, that would have been made applicable were found not breached.”

           

          Joint Surveyors namely R K Singhal & Co. Pvt. Ltd. and A K Govil & Associates and P C Gandhi & Associates have mentioned that extent  of damage as follows :

 

The mill has suffered extensive damage due to fire at the main Mill area where major working components are installed.  Fire was aggravated due to presence of oil, Coolant oil & circulating air (Exhaust & Ventilation) engulfing many major components.

Damages were also aggravated due to Fire fighting i.e. water on hot surfaces for items like Mill Housing, bearings, Rolls, Cartridges etc. due to thermal shocks.

Manufacturers, M/s Flat Products Eqpt. India Ltd. have examined the Mill in detail and have expressed their view that the damage is extensive and repairs are not likely to be possible for most of the items and for few items where efforts can be made but may not be economically viable.

We have examined various assemblies/parts and components by making several visits to the Insured’s premises and to their supplier Flat products at Mumbai.

 

 

 

On the claim of the insured they have commented  as follows :

 

Based on the detailed inspection by the manufacturer’s M/s Flat Products Equipments (I) Ltd. Bombay, Insured initially proposed the machine as total loss indicating the loss at Rs. 3508 lacs.

 

Note :  The Insured’s above claim includes Rs. 420 lacs towards Excise Duty, which will not be payable as they are availing Modvat facility.  Thus their effective claim reduces to Rs. 3028 lacs.

 

          As against this loss assessment as follows :

“It is understood that cost of imported Mill of similar type is nearly three Times indigenous Mill supplied by M/s Flat Products.

           

M/s Flat Products are enjoying a Monopoly situation, as no other local manufacturer is available.  It appears that M/s Flat Products are enjoying good reputation for quality as well as customer satisfaction but on the aspect of price, it may be difficult to negotiate.  Therefore, in case of repair, they were not agreeable to give any break up of Rs. 25 crores plus taxes and other incidentals totaling to Rs. 26.76 crores.  Besides, overall mill performance is to be guaranteed by them and hence they prefer to have total order if guarantee is required.

 

Flat Products are not agreeable to give any item wise break up.  If we exclude certain items which are not indemnifiable under the fire policy which amounts to approx Rs. 200 lacs, balance of cost of repair payable remains at Rs. 24.67 crores.

 

On initial inspection, Flat Products had ruled out possibility of any repair and recommended total loss.  They were also not agreeable to give any breakup cost and indicated cost of new Mill as Rs. 28  crores  (Excluding taxes, duties, freight etc.)  On our insistence, insured persuaded M/s Flat Prdoucts to submit a provisional cost breakup under various assembly units for completely new mill.

On the basis we have assessed the loss under enclosed Annexure – II.  We have segregated items treated as total loss and items treated as repairable.  For total loss items, break up in replacement cost was considered as the value for repair, reasonable cost of repair on the basis of extent of damage was accepted.  Based on the exercise, loss assessment was worked out at Rs. 20.14 crores which being lower by over Rs. 4.00 crores compared to working as per item 1 above at Rs. 24.67 crores, we have considered the same as Final Assessment on Reinstatement basis.”

 

          Despite this, the Insurance Company has sent a letter to the surveyor on 12.11.2002 as follows :

“With reference to the above, we have noted that the insured are unable to produce invoices to establish the actual cost and age of the Mill affected in the said occurrence.

As considerable time has elapsed and since the insured has not been able to establish and substantiate their claim, we may consider the claim on depreciated value basis taking into account the maximum depreciation applicable to such Mill.  As such, we request you to let us have your working on the above lines to enable us to put up the matter to the competent authority for their consideration.”

 

          After the joint final report was already submitted on 11.12.2001 the surveyors persuaded by the letter of the Insurance Company dated 12.11.2002 have reduced their assessment further on depreciation basis and charged 60% depreciation. It is interesting to note that this letter was issued during pendency of case before us.  It is important to note that in the interim report also the depreciation was taken @ 4% for eight years @ 32% whereas after receipt of this letter the joint surveyors have assessed the loss on depreciation basis taking depreciation at 60%.  The issue now to be decided is whether we should allow 32% depreciation or 60% depreciation.  In this connection it is worthwhile to see the facts filed by the Insurance Company in response to our direction dated 17.7.2006 which reads as follows :

“Claim of the complainant was settled by the opposite party – insurance company on 60% depreciation as the complainant had failed to furnish the information asked for.  In the event of complainant – company furnishing the requisite information, depreciation was chargeable @ 4% p.a.  On being asked the basis for charging depreciation at the said rate, Shri Midha seeks two weeks time to filed additional affidavit.  Needful be done within that period.

Counter affidavit if any, may be filed within a week thereafter by the complainant – company.”

 

Extract of the affidavit filed by the Insurance Company reads as follows :

“There are no written guidelines for computing depreciation @ 4% per year.  However, there is established practice to calculate the depreciation in the case of old machinery @ 5% per year upto maximum of 75%-80%.  The Surveyors M/s P.C. Gandhi and Associates assessed the claim of M/s Transpeck Industries Ltd. by computing the depreciation of 75%.  In the case of M/s Modern Denim Ltd. the surveyor applied the depreciation of 50% for 10 years usage considering 20 years machine life.  Copy of surveyor’s letter dated 20^th December, 2006 is Exhibit R-1.  The copy of the surveyor’s report dated 19^th March, 2003 with respect to M/s Transpek Industries Ltd. is Exhibit R-2 hereto.  The copy of the Surveyor report dated 25^th February, 2003 with respect to Modern Denim Ltd. is Exhibit R-3 hereto.”

            The above extract shows that there are no standard guidelines for calculating depreciation.  It has been calculated differently for different units in the past.  The Insurance Company has only quoted those instances of very high depreciation, jut to suit their convenience.

          The rate of depreciation applied in this case by the Insurance Company is not based on either the statutory norms or by the standard guidelines laid by Tariff Advisory Committee or by any general circular laying down standard guidelines by the New India Assurance Company itself.   Though on 17.7.2006   when the matter came up for hearing we have passed an order giving two weeks time to file additional affidavit, the same was filed after several months.

 

 

          In this affidavit Insurance Company has stated that

(a)             There are no written guidelines for computing depreciation @ 4% per year.

(b)             However, there is established practice to calculate the depreciation in the case of old machinery @ 5% per year upto maximum of 75%-80%.    They have quoted stray cases wherein they have computed depreciation @ 75% and also @ 50% which are not applicable to the case in hand.  In short this additional affidavit leads to the conclusion that there are no standard guidelines issued by any statutory authority or by New India Assurance Company itself laying down at maximum depreciation of 60% should be charged.

 

In our view, though the surveyors have submitted their final report on 11.12.2001, 11 months after the same the Insurance Company sent a letter asking the surveyor to calculate the maximum depreciation and revise their calculation.  This, in our view, is not a healthy practice.  This will shake the faith of the insured in the Insurance Company.  The surveyors have finally assessed the amount payable after depreciation at Rs. 13,15,27,000/-.  The Insurance Company is directed to pay this amount with 10% interest per annum after two months from the date of the submission of the survey report to the Insurance Company.  The amount already paid by the Insurance Company i.e. Rs. 4,92,80,905/- and also a sum of Rs. 2,81,81,343/- on subsequent dates may be deducted out of this and for the amount paid no interest would be payable from the respective dates of payment.   The Insurance Company shall also pay Rs. 50,000/- as cost to the complainant.

 

…………………….J

[ K S Gupta ]

Presiding Member

 

 

 

…………………….

[ P D Shenoy ]

Member

Rajani